1. To finance the purchase of a car should Frank consider a short-term, medium-term or long-term source of finance? Give reasons for your answer.
2. Check if other students in the class agree with your choice and your reasons.
4. What short-term sources of personal finance are available?
Case Study Understanding Credit
Imagine that you agree to buy a video game from your friend for €10. You don’t have any money with you so you agree to pay her next week when you see her again. She gives you the game and you take it home. You have just bought the game on credit.
Credit is an arrangement between a buyer and a seller to ‘buy now and pay later’. In business the seller often charges a fee for this service. If the buyer does not pay as agreed, the seller will start charging interest to encourage the buyer to pay the money due.
If you forget to pay your friend for the game next week then she is likely to be annoyed with you. She will consider you to be unreliable and a credit risk. She is unlikely to want to sell you anything again until you first pay off your debt to her.
(a) Credit purchasing
Buying on credit means receiving the goods now but paying for them later. For most people, utilities such as electricity, gas, and broadband are consumed in advance. They are then paid for at the end of a one or two-month period when the amount of usage is calculated. This gives the customer up to two months credit before the bills have to be paid.
(b) Credit cards Credit cards are financial products that allow people to buy goods on credit up to a certain value without needing cash. The credit card company pays for the goods. Credit cards can be used in shops and also for online purchasing. The credit card company provides a monthly statement of your credit purchases and cardholders can decide to pay off part or all of the bill each month.
